If America and the rest of the West is feeling a chill right now, then Russia
is positively freezing.

On Friday, both Russia’s stock exchanges saw dramatic falls – with MICEX, the leading exchange controlling 99pc of volume in Russian shares, bonds and commodities, falling 14.2pc after being suspended twice and closing early. Moreover, MICEX chose to suspend all trading today , to allow investors time to digest what appears to be the new economic order, before reopening tomorrow.

Russia is not alone. Having ridden the crest of the bullish wave to the middle of 2007 as one of the BRIC nations – Brazil, Russia, India and China – it is paying the price of being an emerging economy in a downturn.

Just as Argentina has decided to nationalise pensions to tackle its own financial crisis, and Iceland has been forced to go cap in hand to the International Monetary Fund, so Russia has its own unique problems.

The MICEX has now fallen 74pc from its peak in May 2008 – compared to the S&P 500 which is down 40.3pc year-to-date, and the FTSE 100, which is now 41pc lower than its peak last autumn.

One of the main reasons for this fall is because of the way the country’s investment market is structured. In the months and years running up to the top of the bull market, Moscow became a home for what MICEX chief executive Alexei Rybnikov unashamedly calls “hot money”.

“The specific Russian problem in this context is because of the general deficit of long-term buy-and-hold investors. When we became caught in this situation, the leveraged hot money was all gone very fast and we had no domestic investors to support the falling market,” he says.

Rybnikov, who has run MICEX since its formation in November 2003, blames the rapid falls on the degree of hedge funds and other leveraged investors who deserted the market almost as quickly as they entered.

As Rybnikov points out, one reason foreign investors were able to exert such power on Russian markets was because of the lack of a domestic shareholder base. The number of Russians who trade in any form of securities is approximately 1m-1.5m, up to 1pc of the country’s 140m population. In the US, this figure is 50pc of households.

In addition, the investment industry is somewhat scant, with entire assets in Russian pension funds, insurance companies running into just dozens of billions of dollars – with very few domestic long-term funds. Impressive, until you consider that MICEX trades $17bn worth of equities, bonds, derivatives and currencies every day.

“The development of the domestic investor base was something talked about in the past several years,” explains the MICEX chief. “But that growth did not happen [for political reasons] and as a result all of the negative features of the Russian capital markets came into play.”

Those negative features are now affecting not just the country’s capital markets, but the economy as a whole.

On Friday, the cost of insuring Russian governments bonds against defaults rocketed. Perhaps even more worrying was credit rating agency Standard & Poor’s issuing a downgrade notice on those bonds, warning that $200bn of state rescue packages designed to ease the crisis could begin to erode the country’s finances.

Unsurprisingly, perhaps, the Russian economy looks to be in somewhat of a precarious situation. The entire Russian oil industry is now worth less than Brazilian oil giant Petrobras, and some banks are now trading at less than half book value.

“The biggest problem in the Russian economy is a general lack of trust. People are too much afraid to lend money,” says Rybnikov. That said, he clearly believes the structure of Russia’s economy is sound, with a boom in many industries, as seen in the growth of its consumer and production markets.

“Now, we’re looking at events through a darkened piece of glass. It’s definitely worse than was thought by many, but I don’t think it’s catastrophic.”

Part of the reason for Friday’s stock market fall in Russia was because the government released figures showing that gross domestic product slowed to 0.4pc.

According to Peterson Institute economist Anders Aslund, writing in the Moscow Times, the problems in the economy are three-fold.

First, the banking system has frozen, which led the country’s central bank chairman to say recently he expects 50-70 Russian banks to collapse. Second, as a direct result of the frozen lending markets, Moscow’s booming real estate market is slowing dramatically. Third, commodities, around 25pc of Russia’s GDP, are falling in price, hitting the country’s fiscal firepower.

Yes, argues Aslund, Russia traditionally had huge reserves, but with $70bn of those reserves having already left the country, the question remains how strong the Russian economy actually is.

That question continues to weigh heavily on MICEX, whose downward volatility is hurting Moscow’s reputation as a place to do business.

Rybnikov is hopeful for the future not only of MICEX, but for Russia’s capital markets as a whole, however.

“I think the crisis put into focus the problems in Russia; the lack of pension reform, lack of structural reform. It’s very clear that we do need pension funds for long-term money,” he argues, looking on the bright side of a situation which, right now, seems somewhat bleak.